Government Considers Fuel Price Hike

By Andrew Willis, Contributing Reporter

RIO DE JANEIRO, BRAZIL – The first quarterly loss in thirteen years at state-controlled oil company Petrobras has sparked a debate within the Brazilian government over the need for a rise in fuel prices, with ministers delivering conflicting messages last week. On Wednesday (August 8th), Brazilian Mines and Energy Minister Edison Lobao said that a price adjustment was necessary and a real possibility, but added that no decision had been made yet to authorize one.

The comments led to a rapid rise in Petrobas share prices, however just hours later, Finance Minister Guido Mantega appeared to contradict his colleague by saying there was no increase in fuel prices “on the horizon”.

From Petrobras’ perspective, Chief Executive Maria das Graças Silva Foster has said that new fuel price increases will be needed to stem losses in the company’s refining division. A shortage in domestic supply means the division is currently struggling under the cost of international oil imports and a government policy that forces it to sell petrol and diesel at a loss.

Brasília allowed Petrobras to raise wholesale prices of petrol and diesel in June for the first time in six years, but analysts say there is still a disparity between international oil prices and the price of fuel in Brazil. Foster also says a price hike is necessary to pay for the company’s US$237 billion 2012-2016 investment plan, the world’s largest corporate spending program.

One reason the government is hesitant about raising fuel prices is the knock-on effect for inflation, with a hike likely to be politically unpopular. Just weeks ago President Dilma Rousseff promised Brazil’s economy would grow faster in the latter half of 2012, thanks to a number of incentives including tax breaks and interest rates cuts.

On the streets of Rio de Janeiro, reaction to the news was mixed. “It doesn’t bother me,” said Jorge Silva a taxi-driver in Ipanema whose vehicle runs on natural gas.

But others were less sanguine. “Petrol in Brazil should already be cheaper than it is. We’re supposed to have lots of oil just sitting out there,” said Marivaldo de Souza, a motorist in Copacabana, pointing out to the sea. “Prices in the supermarkets will go up if petrol prices increase. Only a few cents per product, but it all adds up.”

One element that could potentially counteract government moves to raise fuel prices in Brazil is news that global growth in oil demand is likely to fall below previous expectations next year.

A slow-down in global activity, especially China, is the main reason for the weaker-than-expected demand, the International Energy Agency (IEA) said on Friday, August 10th. It cautioned, however, that continued geopolitical instability could hit the supply side, pointing to sanctions against Iran and unrest in Syria and other parts of the world.

“The geopolitical dimension is likely to continue to provide something of a floor for prices. The issue of Iran will likely continue to weigh heavy on the market through the second half of 2012,” the IEA said in its monthly report.

“Moreover, there is a risk that recent progress in restoring output from Libya, Iraq and Nigeria could be jeopardized if recent political and civil tensions worsen.”